(Bloomberg) — German output was dragged down by a slump in investment in the fourth quarter — putting Europe’s biggest economy on course for its first recession since the pandemic.
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Gross domestic product shrank 0.3% in the three months through December, as initially estimated, the statistics office said Friday. Capital investment plunged by 1.9%, while private consumption rose 0.2% and government spending advanced 0.3%.
The data highlight Germany’s protracted weakness — a performance that’s becoming an increasing concern for politicians in Berlin. The government this week slashed its growth forecast for 2024 to just 0.2%, following a 0.3% contraction over the whole of 2023.
The export-reliant economy has been suffering from weak foreign demand, high interest rates, the loss of Russian energy supplies and geopolitical tensions. Disagreements within Chancellor Olaf Scholz’s three-party coalition and a court ruling disrupting its spending plans have heightened uncertainty.
Manufacturing, on which Germany relies more than many other countries for growth, has been in a long downturn. A survey Thursday showed the retreat unexpectedly deepened in February as new orders plummeted both at home and abroad.
The Bundesbank reckons GDP may drop again in the first quarter, which would tip the country into a recession. That may feed the debate about Germany’s longer-term prospects, which are clouded by concerns over excessive bureaucracy, a quickly aging workforce and a lack of investment in infrastructure and crucial technologies.
“We need to do more to tackle the reforms in order to maintain Germany’s competitiveness in a completely changed environment,” Economy Minister Robert Habeck said Wednesday.
Rate cuts by the European Central Bank and some of its peers expected in the coming months may bring some relief. Pay increases for workers and slowing inflation are meanwhile seen stoking private consumption.
–With assistance from Kristian Siedenburg and Joel Rinneby.
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Germany’s office property market has seen a record drop in prices, coupled with disappointing returns for investors.
German office properties have seen a significant slump in price despite an increase in returns, according to new figures.
Office property prices fell by 5.2% in the last quarter of 2023 – compared to the previous quarter – and 13.3% year-on-year, German banking association vdp said in a press release on Monday.
The numbers mean that Germany’s office building market has seen its sharpest drop since 2004.
The picture is less severe when looking at retail property prices, vdp said, which dropped by 9% year-on-year and 3.9% quarter-on-quarter. However, the banking association noted that retail properties have been suffering from a fall in prices for much longer than office properties.
According to vdp, retail rents under new contracts increased by 2.5% yearly – a record since 2019. Despite limited growth in retail rents since 2003, returns on retail properties rose by 12.7% in the last quarter of 2023, breaking previous records.
Returns on office properties also rose 17.5% in the final quarter of 2023 compared to the same period in 2022, vdp said.
Nevertheless, they have so far failed to meet investors’ expectations, according to Jens Tolckmitt, vdp’s chief executive.
“On top of this, demand for offices remains subdued due to the uncertain economic growth in Germany and the still unclear impact of the working from home trend on office space needed,” he added. “So prices continue to depress. Retail properties, on the other hand, are much further along in the cycle, as evidenced by the first increase in rent under new contracts for more than four years.”
When asked about his outlook for the property market in the current year, Tolckmitt expressed caution.
“The property market remains in a downturn as we start 2024, and prices continue to drop. It will be some time before property buyers and sellers reach a new price balance, and only then will we see a noticeable recovery in the market,” he said.
The past 12 months has been a rocky time for house prices. The personal finances of many buyers and sellers have come under great strain from rapidly rising interest rates and inflation. Global inflation hit 8.7pc in 2022 dropping to 6.9pc in 2023, according to the World Bank.
At the same time concern about climate change is pushing governments to introduce increasing amounts of regulation in order to improve the energy efficiency of buildings and reduce people’s power usage.
Caught between these two pressures, house prices are being forced downward – and Germany’s property market is a leading example of this dynamic at work.
Prices of houses with low environmental ratings in Germany are falling faster than those with better ratings, because buyers expect net zero regulation will become even tighter. Analysts expect the gap in house prices to continue widening.
Franziska Marie Biehl, economist at Dutch bank ING, said: “Prices for properties with lower energy labels have fallen more significantly than prices for those with a good energy label.
“In our view, prices for old buildings in need of renovation are likely to drop even sharper than the current market environment would already suggest, widening the gap.”
In 2023 the price of a home with an energy label H was on average 45pc lower than that of a residential property with an A+ energy label.
Only 3pc of current German housing stock has been built since 2011 and is therefore likely to need renovation in the coming years, reducing its value.
A survey by estate agent McMakler in 2021 found that 10pc of properties built before 1979 are classified as A, A+ or B. For residential properties built after 2010, the share is more than 70pc.
Refurbishments to improve energy efficiency cost between €400 and €600 per square metre on average, leading many homeowners to opt to sell rather than renovate.
Concerns around regulation are to blame for a fall in buyer demand, says Michael Heming, managing director of Heming Immobilien estate agency.
“People are very worried because they could be paying €300,000 to €400,000 to buy a house, and then have to install heat pumps that they cannot afford.”
Much of the concern is thanks to the Building Energy Act amendments that were passed by parliament in autumn last year. While the legislation has been watered down and has been challenged in court on the basis of procedure, it is going ahead.
Under rules introduced on Jan 1 this year, every new heating system installed in new developments in Germany must now use at least 65pc renewable energy.
For existing buildings, the requirement will come in from January 2026 or 2028, depending on the size of the municipality.
Is the UK also at risk?
The UK could face a similar reckoning. The majority of buildings here are rated D or above, and while Rishi Sunak backtracked on his requirement for buy-to-lets to be C or above by 2028, there is no word yet on what a Labour government would require.
There have been warnings that the requirement for C grade properties could “implode the sector”.
Hamptons estate agents estimates that the total cost to upgrade England’s existing rental stock to band C would be £16bn. This would be equivalent to almost half a year’s rental income.